The Real IRS Scandal That No One Is Talking About

I’m not all that outraged that the I.R.S. held up applications by Tea Party groups for tax-exempt status. I’m outraged that any of them—or their liberal counterparts—qualify for that status at all.

Unfortunately, given the way this I.R.S. scandal slid so easily into ideological definitions, I fear that few non-politicos are recognizing the real disgrace here: that the federal government—Congress, the White House, the tax agency, and the Supreme Court—has created a situation where blatantly political organizations are able to legally break the law by pretending they’re something that they’re not.

The key to this obscene state of affairs is an entity known as a 501(c)(4), named for the section of the tax code that created it. Supposedly, these are civic associations or organizations devoted to social welfare, which can operate tax-free, but whose donors aren’t allowed to deduct their contributions. Fair enough.

But then comes the loopholes that politicos have used to drive not only a truck through the intention of the law but a whole fleet. Unlike a wholly charitable organization, a 501(c)(4) can engage in political activities, so long as it is not its primary purpose. In other words, I could form an organization that spends 49.99999 percent of its time, energy, and money on politics and still be deemed tax exempt. In other words, you, me—every American citizen—can be providing a tax subsidy to groups that (theoretically) are spending almost half of their money on politics. It’s worse than that. Under the law, a 501(c)(4) can spend an unlimitedamount of money on lobbying, so long as it is related to its “primary purpose.” So, in truth, an organization can be fully political under any rational interpretation of the meaning of that word, yet be deemed not to be primarily political under the law.

The floodgates for this disgusting arrangement were largely opened—like almost all things that have perverted modern American democracy—from the Supreme Court’s 2010 decision in Citizens Unitedvs.Federal Election Commission.* *This is the case where the Supreme Court ruled that corporations, associations, and labor unions have the right to invest unlimited amounts of money in political campaigns under the specious idea that they held the same rights to free speech that individuals do. In other words, that those entities with cash—that don’t even have the right to cast a ballot—get to be heard more on political issues than individual voters do. While they can’t give money to specific candidates, they can do whatever they want to support them so long as they act independently.

Some commentators and politicos—almost all Republicans—hailed the decision as a victory for free speech, one that would improve the system. “There will certainly be campaign abuses, as there are now, and many will not be happy with the court’s ruling,” Ed Rollins, a longtime G.O.P. political consultant, said at the time. “But the full disclosure law lets you know who is doing what and that’s a good thing.”

Yah, right. Add in the 501(c)(4) rules, and you don’t get to know what anyone is doing.Citizens United specified that 501(c)(4)s could make expenditures in political races, so long as they meet the “primary purpose” standard. And while these organizations have to disclose the money they spent, they don’t have to say anything about who donated it. So, if Joe the Multibillionaire wants to have greater say in the direction of our political system than any other individual, he could legally launder $500 million through a 501(c)(4), which then spends $249.999 million on political races, and another couple of hundred million on lobbying, grass-roots organizing, etc.

If you don’t see the abuse set in motion here, let’s take a look at a hypothetical 501(c)(4). I form an organization dedicated to, say, advocating for public support of Obamacare (yes, I picked an example I hope will rile up conservatives, to get them to understand how outrageous this is).

My organization is a 501(c)(4), since, under the law, I am able to self-designate its tax status. Truthfully, I never have to file for I.R.S. approval; the fact that I have decided that my group qualifies under the rule is enough. There is the danger that the overworked and understaffed tax agency might later choose to closely review my organization—one of untold thousands out there—and rule that it was, in fact, not qualified as a 501(c)(4), which might require it to pay back taxes. But more important, my group would have to disclose the names of all of its contributors, when hiding those identities is the main point of most of these political 501c4's. And so, I might decide to go ahead and file for approval, particularly if I’m close to—or over—the line “limiting” political activity.

My application could say that my primary purpose is to educate the public about the benefits of comprehensive government health-care programs. If I spend 49 percent of my time and money directly in support of candidates who back Obamacare, I’m fine. If I spend the rest of my money on lobbying, organizing grass-roots groups, and “educating” them about the importance of Obamacare, I’m right on the line, but still could be approved. (And remember, I don’t have to seek I.R.S. approval in the first place before I stop paying taxes.) In other words, I have formed a group that exists solely for political purposes, both for supporting individual candidates and lobbying, both direct and grass roots. It’s fine for me to form such an organization, but why the hell should it be getting tax subsidies through exempt status?

O.K., now imagine you are an I.R.S. official responsible for reviewing the thousands of applications submitted each year by groups claiming to be 501(c)(4)s. Which do you think deserves special attention to determine possible violations of the political rules? My fictitious group, Patriots for Obamacare? Or the Laurel Garden Club?

And there, in large part, is the “scandal.” Imagine you are one of the handful—and it is literally a handful—of officials in the Determinations Unit in Cincinnati, Ohio, which is responsible for determining whether a purported 501(c)(4) is primarily engaged in political activities. In the aftermath of Citizens United, you are flooded with new applications from groups seeking 501(c)(4) status—in a couple of years, according to the I.R.S. inspector general’s report, the number almost doubles from 1,751 to 3,357. The number of people working to determine if these are primarily political organizations stays about the same. You need to find a way to come up with a means for determining which mightbe solely political groups masquerading as social-welfare organizations. But Congress, in its infinite wisdom, has given you no easy definitions or standards to determine what does or does not constitute political activity.

Plenty of these new applicants have words like “Tea Party” and “patriot” in their names. In fact, in 2010, most of the new applicants were on the conservative side. So, you make a decision to give scrutiny to groups with names from a political movement as a basis for determining if they are political. (Problem is, the only thing similar on the liberal side is the Occupy movement, and there aren’t many organizations with that in their name that are 501(c)(4)s. Maybe the word “progress” or “progressive,” but again, that number appears to be fairly small.)

There’s no denying that the decision to use the name shorthand was an error, because it created the appearance—and I can’t rule out this may have been part of the intent—that roadblocks were being thrown in the way of conservative organizations. But bear one thing in mind—this didn’t stop the groups from operating just as they otherwise would have. Moreover, it didn’t stop them from self-designating as 501(c)(4)s, if they truly believed that their status was an easy call. All it meant was either their contributor names had to be disclosed or the groups had to take a risk of a negative I.R.S. determination in the future.

We can’t pretend this system isn’t being grotesquely abused. Crossroads Grassroots Policy Strategies—a Karl Rove group that is run by a bunch of political experts that has spent millions of dollars on television commercials attacking Democrats in key Senate races—has been judged as a legitimate 501(c)(4). Moveon.org, the liberal advocacy group, has a 501(c)(4) offshoot. But it makes perfect sense that more conservative groups attracted attention—it’s a matter of arithmetic. In 2010, the year the reviews in question began, the majority of new applications were from organizations on the right.) Moreover, records show that conservative 501(c)(4)s were by far spending more money on politics: the top five liberal 501(c)(4)s spent $11.3 million in political expenditures in 2010, less than half of the $26 million spent by the top conservative group. The top five conservative groups spent $63.6 million on politics, six times the amount put out by those top five liberal 501(c)(4)s.

Even some prominent conservatives didn’t get the memo about what to call 501(c)(4)s that are supposed to be primarily non-political. For example, there is no doubt that the conservative Heritage Foundation is a legitimate 501(c)(3)—a group that can collect tax-deductible contributions, since it serves almost exclusively an educational purpose. But then Heritage decided to set up a 501(c)(4) called Heritage Action for America, which under the rules is supposed to be primarily notfor politics. But go to the organization’s Web pagefor donations, and take a look at how prominent conservatives describe it. Sean Hannity is quoted as saying, “Heritage Action is the political muscle that turns conservative policy ideas into conservative realities on Capitol Hill.” Margaret Thatcher is quoted saying, “Heritage Action will be a transformational force in American politics.”

Here’s the bottom line for me. This scandal is all about a few people at a Cincinnati office of a Washington agency struggling to apply undefined rules at a period of unprecedented transformation in American politics. Conservatives and liberals will scream and tear out their hair about those poor folks making a mistake.

Then they will proceed with their effort to undermine American democracy by abusing the intent of federal law. And thatis the scandal that all of us should really care about.